CITATION: North American Property v. First Capital Realty, 2015 ONSC 372

COURT FILE NO.: CV-14-10818-00CL

DATE: 20150128

SUPERIOR COURT OF JUSTICE – ONTARIO

(COMMERCIAL LIST)

RE: North American Property Corporation and The Coughlin Realty Corporation carrying on business as North American Development Group 1 and North American (Bovaird) Corporation, Plaintiffs/Moving Parties

AND:

First Capital Realty Inc. and First Capital (McLaughlin) Corporation, Defendants/Responding Parties

BEFORE: L. A. Pattillo J.

COUNSEL: Eliot N. Kolers and Vanessa Voakes, for the Plaintiffs/Moving Parties

Crawford Smith and Jeremy Opolsky, for the Defendants/Responding Parties

HEARD: January 16, 2015

ENDORSEMENT

Introduction

[1] The plaintiffs, North American Property Corporation and The Coughlin Realty Corporation, carrying on business as North American Development Group 1 (“North American”) move for an interim and interlocutory injunction restraining the defendant, First Capital Realty Inc. (“First Capital”) and any of its agents, officers, directors or employees from unilaterally terminating Centrecorp Management Services Partnership (“Centrecorp”) as manager of property located at the intersection of Bovaird and McLaughlin in Brampton, Ontario (the “McLaughlin Property”) along with other ancillary relief.

Background

[2] The McLaughlin Property is a commercial and retail plaza and is jointly owned 50/50 by North American and First Capital. It has been managed by Centrecorp since it was purchased by the two parties in November 2001. Centrecorp is an affiliate of North American.

[3] Since the year 2000, North American and First Capital have co-owned properties and engaged in property development joint ventures. The co-owned properties were managed by Centrecorp at the time of their acquisition. As at November 2014, the McLaughlin Property was the last remaining property co-owned by the parties.

The Co-Owners Agreement

[4] The relationship between North American and First Capital in respect of the McLaughlin Property is governed by a Co-Owners Agreement made as of the 30th day of November, 2001 as amended on November 19, 2003 and September 13, 2004 (The “Co-Owners Agreement”). The Co-Owners Agreement is a lengthy document which governs and defines the “rights, proceeds, revenues, benefits, liabilities, interests, powers and obligations” between North American and First Capital (the “Co-Owners”) with respect to the McLaughlin Property.

[5] Section 2.7 of the Co-Owners Agreement provides that the co-owners agree to retain Centrecorp as manager of the McLaughlin Property pursuant to the terms and conditions of the Management Agreement. The term of the appointment is until the earlier of (a) the date on which none of North American, First Capital or their respective affiliates owns a Co-Owner’s Interest; and (b) the date which is the later of: (i) March 29, 2004; and (ii) the date on which neither North American nor any of its affiliates owns a Co-Owner’s Interest.

[6] Section 3.1 of the Co-Owners Agreement establishes a Co-Owners committee. Section 3.1(a) provides that subject to, among other things, Section 2.7 (the appointment of the Manager), all decisions and determinations required to be made by the Co-Owners in respect to the McLaughlin Property if not in writing by both Co-Owners, shall be made by a Co-Owners committee (the “Co-Owners Committee”) comprised of four members, two each from North American and First Capital. The sub-section further provides:

Any resolution to be passed or action to be taken by the Co-Owners Committee at a meeting must have the unanimous support of the Co-Owners as evidenced in the case of each Co-Owner either by the affirmative vote of the members of the Co-Owners Committee appointed by such Co-Owner or the previous approval in writing by such Co-Owner.

And further:

The Co-Owners further agree that there are no limitations on the authority of the Co-Owners Committee in regard to decisions made pursuant to this Agreement.

[7] Section 3.1(d) provides that the powers of the Co-Owners Committee may only be exercised by resolution at a meeting at which all four members are present or by resolution in writing consented to by the signature of one member of the Co-Owners Committee appointed by each Co-Owner.

[8] Section 3.1(h) provides that at all meetings of the Co-Owners Committee every question shall be decided by the unanimous vote of the members of the Co-Owners Committee present and entitled to vote.

[9] Section 4.1 which is headed “Decisions” provides in part that all decisions with respect to the McLaughlin Property shall be approved by the Co-Owners, acknowledging that certain responsibilities have been delegated to the Manager with the approval of the Co-Owners pursuant to the Management Agreement. The section further provides: “Each Co-Owner agrees that all decisions concerning the Project required to be made by it shall be made by it in good faith and strictly upon the merits of the proposed action, and the making of such decisions shall not be unreasonably withheld or delayed.”

[10] Section 4.2 provides for full disclosure by the Co-Owners of non-arm’s length transactions involving the McLaughlin Property and specifically acknowledges that North American has satisfied its obligation in that regard in respect of Centrecorp and the Management Agreement.

The Property Management Agreement

[11] Contemporaneous with the execution of the Co-Owners Agreement, and as referred to therein, North American, First Capital and Centrecorp entered into a property management agreement made as of the 30th day of November, 2001. That agreement incorporates by reference the terms of a multi-property management agreement between the parties and dated January 1, 2000. The November 30, 2001 agreement was subsequently replaced by a new property management agreement dated October 1, 2003 which is the management agreement that has applied to the McLaughlin Property (the “Property Management Agreement”).

[12] The Property Management Agreement appoints Centrecorp as the exclusive manager of the McLaughlin Property and agent of the Co-Owners as required to carry out the management duties under the agreement. It sets out the duties and powers of the property manager. As in the Co-Ownership Agreement, the term of Centrecorp’s appointment is until the earlier of (a) the date on which none of North American, First Capital or their respective affiliates owns a Co-Owner’s Interest; and (b) the date which is the later of: (i) March 29, 2004; and (ii) the date on which neither North American nor any of its affiliates owns a Co-Owner’s Interest.

[13] Section 6.1 provides that Centrecorp will carry out its duties under the agreement “with due diligence and care and acting as would a prudent manager of a similar development. In performing its obligations under this Agreement, the Property Manager will exercise the same degree of care, skill and supervision as would be exercised by a reasonable and prudent owner of comparable properties and of the same class in the same or similar locations as the Properties.”

[14] Section 6.4 provides that the Property Manager is an independent contractor and the scope of its duties is limited to its duties as provided in the agreement. Section 6.5 provides that in performing its duties under the agreement, the Property Manager acts in a fiduciary capacity and specifically refers to conflicts of interest, other properties and concessions.

[15] Section 7 provides for termination for default. Section 7.1 provides that if an “Event of Default” occurs, the Owner may, in addition to other remedies, give written notice that the Property management Agreement is terminated. Section 7.2 defines “Event of Default” to mean any one of: a breach of the Property Management Agreement capable of remedy and which is not remedied within 30 days of written notice or if longer time is required, not started within the 30 days; a breach of the Property Management Agreement not capable of being remedied; malfeasance or misfeasance, gross negligence or wilful misconduct of the Property Manager in the performance of its duties under the Property Management Agreement, a breach of s. 6.5(c) of the Property Management Agreement (accepting commissions from third parties in the performance of its duties under the Property Management Agreement); and an Event of Insolvency (defined) by the Property Manager.

[16] For over 13 years, Centrecorp has managed the McLaughlin Property without a single complaint by or notice of default from First Capital with respect to its performance of its property management functions at the McLaughlin Property.

[17] By letter sent by fax from First Capital’s general counsel on November 26, 2014, First Capital gave notice to North American of the first ever meeting of the Co-Owners Committee. The stated purpose of the meeting was to approve the termination and replacement of Centrecorp as the Property Manager of the McLaughlin Property. The reason given was that Centrecorp had breached its fiduciary duties as property manager in respect of its actions as manager of a property in Quebec which had been jointly owned by the Co-Owners and managed by Centrecorp (the “Quebec Property”). As a result, First Capital stated that it had “lost all confidence in Centrecorp as property manager and its ability to meet the high standards expected of a fiduciary. The lack of trust and confidence cannot be remedied.” First Capital further stated that, given the relationship between North American and First Capital, “we expect that the North American representatives on the Co-Owner’s Committee will recuse themselves from the vote in relation to this issue.”

[18] On November 28, 2014, Centrecorp’s counsel responded to the letter denying any breach of Centrecorp’s duties as property manager either with respect to the McLaughlin Property or the Quebec Property. Among other things, the letter pointed out the provisions in the Co-Owners Agreement concerning the term of Centrecorp’s appointment as the property manager and the requirement that all decisions of the Co-Owners must be unanimous. It further indicated that there was no basis upon which North American’s representatives should be recusing themselves from voting at the meeting.

[19] The meeting of the Co-Owners Committee was held by conference call on December 19, 2014. Mr. Dori Segal, the President and CEO of First Capital and Mr Roger Chouinard, First Capital’s General Counsel, were First Capital’s representatives. Mr. Robert Green, the President of North American and Terrence Coughlin, one of its owners, represented it. First Capital’s representatives voted in favour or the resolution to terminate Centrecorp and took the position that because North American was not at arm’s length from Centrecorp, its representatives were not entitled to vote. First Capital then declared that Centrecorp was unanimously terminated by the Co-Owners effective January 1, 2015. North American’s representatives disputed First Capital’s position.

[20] The following is an excerpt of the proceedings at the meeting taken from the unofficial transcript of the recorded call:

Mr. Segal: We called this meeting – it’s Dori – we have one thing on the agenda which is the termination of Centrecorp as the Property Manager effective January 1st. … I suggest we put it to a vote. You guys have to excuse yourself from the vote given the fact that you are conflicted…

Mr. Green: … we do not believe we have to recuse ourselves and so we are going to be registering our vote.

Mr. Segal: Listen, you may do whatever your want, as of January 1st you are terminated, and that’s the way it is.

Mr. Green: This is a Co-Owners Meeting, you can’t terminate a Co-Owner.

Mr. Segal: I just did. I didn’t terminate a Co-Owner, I terminated the Property Manager. You guys are conflicted; it’s irrelevant what you say with respect to this issue…

Mr. Green: … the Co-Ownership Agreement has always assumed there was a relationship between North American and Centrecorp so there’s no reason to be citing a conflict.

Mr. Green: First of all we should have a vote.

Mr. Segal: So we just had a vote. As far as I am concerned --

Mr. Green: -- As far as we’re concerned we’re objecting to that and it is 2-2 on the vote.

Mr. Segal: Your objection is noted. The vote has taken place, you were excused and we voted to terminate the Property Manager. You may of course challenge this in court any time you want, feel free. … as of January 1st Centrecorp is not the Property Manager. We will issue you a letter you are not to talk to any tenants on our behalf. We will of course notify the tenants as well. You are not representatives of First Capital for this property. You are not to talk to tenants without us about this property. You are not to talk to service providers about this property without us, and, this is it.

Mr. Green: Well it seems like you’ve had your own meeting.

Mr. Segal: Exactly.

Mr. Green: So we’re just objecting to the vote that you’ve taken by yourself.

Mr. Segal: No problem.

Mr. Green: And as far as we’re concerned a resolution was not passed, as required. If you want to act unilaterally --

Mr. Segal: -- Yes, we would.

[21] North American has provided the necessary undertaking as to damages.

Analysis

[22] The test for an interlocutory injunction, which is an extraordinary remedy, is well established. The plaintiff must establish three factors: (i) there is serious question to be tried; (ii) irreparable harm will be caused to the plaintiff if the injunction is not granted; and, (iii) the balance of convenience weighs in favour of granting the injunction: RJR-MacDonald v. Canada (Attorney-General), 1994 CanLII 117 (SCC), [1994] 1 SCR 311 (SCC) at para. 43.

1) Serious Issue to be Tried

[23] The test for determining whether there is a serious issue to be tried has a low threshold. Given the nature of the proceeding, only a preliminary assessment of the merits of the case need be made and the court need only be satisfied that the application for the interlocutory injunction is neither frivolous nor vexatious: RJR-MacDonald at paras. 49 and 50.

[24] North American’s claim is based on breach of contract. It submits that First Capital’s purported unilateral termination of Centrecorp as property manager in the face of agreements which expressly require unanimity amongst the Co-Owners for any decision regarding the McLaughlin Property and which provide that the term of the property manager is for as long as North American owns a beneficial interest in the McLaughlin Property, is a clear breach of its contractual obligations.

[25] First Capital denies that it breached either the Co-Owners Agreement or the Property Management Agreement. It submits that it was entitled to recuse North American from voting at the Co-Owners meeting due to its conflict and further that it was entitled to terminate Centrecorp as property manager based on its breach of fiduciary duty.

[26] First Capital submits that because North American is seeking to “enforce Centrecorp’s continuing employment” it is claiming a mandatory injunction resulting in North American being required to establish a strong prima facie case as opposed to serious issue to be tried. See: Cytrynbaum v. Look Communications Inc., 2013 ONCA 455 (C.A.) at para. 54.

[27] I do not consider that North American is seeking a mandatory injunction. The Notice of Motion clearly states that it seeks an interlocutory injunction “restraining” First Capital et al. from terminating or purporting to terminate Centrecorp as property manager of the McLaughlin Property; communicating to third parties that Centrecorp has been terminated; interfering with the business of Centrecorp as property manager of the McLaughlin Property; and breaching their obligations under the Co-Owners Agreement and the Management Agreement.

[28] Even if I am wrong in my characterization of the type of injunction sought by North American, it is my view, on the evidence, that North American has established a strong prima facie case against First Capital. In other words, I consider that on the evidence before me, North American is almost certain to succeed at trial.

[29] I am mindful that at this stage of an action, what is involved in considering the first RJR-MacDonald test is a preliminary merits-based assessment of the plaintiff’s claim as distinct from a final determination of the dispute. That said and based on the evidence before me, I consider that in proceeding as it did at the Co-Owners Committee meeting, First Capital was in clear breach of both the Co-Owners Agreement and the Property Management Agreement.

[30] It had no basis in fact or law in preventing North American from voting at the Co-Owners meeting. Its position that North American was disqualified based on a conflict of interest arising from its affiliation with Centrecorp has no merit. The conflict was known from the outset of the relationship and expressly acknowledged in the Co-Owners Agreement. Nor do I accept First Capital’s submission that North American owes a fiduciary obligation to First Capital as a Co-Owner. The obligations of both North American and First Capital are set out in the extensive Co-Owners Agreement. Nowhere does it describe the relationship as being fiduciary. In my view, North American was entitled to vote at the Co-Owners Committee on issues involving Centrecorp but it is required to do so in the best interests of the McLaughlin Property. First Capital effectively gave it no such opportunity.

[31] Nor does the evidence, in my view, support any grounds to terminate Centrecorp as the property manager. As noted, for over 13 years, Centrecorp managed the McLaughlin Property without any complaint or notice of default from First Capital concerning its management of the McLaughlin Property. First Capital is not alleging that Centrecorp has breached any of its obligations and duties under the Property Management Agreement in respect of its management of the McLaughlin Property. Rather it alleges that Centrecorp breached its fiduciary duties as manager of the Quebec Property by failing to properly respond to its due diligence requests following North American’s exercise of the buy/sell provisions in a co-ownership agreement between them relating to the Quebec Property (the “Agreement”).

[32] It is conceded both by First Capital’s lawyer in his October 20, 2014 letter to Centrecorp and by Mr. Segal in his affidavit filed in response to the motion that Centrecorp “ultimately answered the relevant questions” in respect of the due diligence. In fact the evidence indicates North American and Centrecorp had been responding in a timely way to numerous questions from First Capital and its lawyers between September 12, 2014 and October 9, 2014.

[33] In his affidavit, Mr. Segal further states that subsequent to Centrecorp’s responses to First Capital’s due diligence questions, First Capital discovered “substantial building condition issues in one tenant space” at the Quebec Property. He alleges that Centrecorp failed to notify First Capital of serious foundation and floor cracks in the unit and failed to take appropriate measures to address the problems.

[34] The only evidence with respect to the nature of the “substantial building condition” consists of the allegation in Mr. Segal’s affidavit and a letter from First Capital’s counsel on October 20, 2014 stating: “Centrecorp furthermore failed to apprise FCR [First Capital] of significant deficiencies in the condition of the Property, in particular, affecting the premises occupied by Winners.”

[35] North American’s evidence is that it gave First Capital full and complete disclosure. It provided full and complete access to all information it had concerning the Quebec Property, answered all relevant questions and provided complete access to all files and reports maintained by Centrecorp on-site. In addition, First Capital conducted its own site visits.

[36] There is no basis in the evidence to support First Capital’s purported termination of Centrecorp as the property manager of the McLaughlin Property. There is no evidence that Centrecorp committed an “Event of Default” under the Property Management Agreement in respect of its duties under that agreement or was given any notice of an Event of Default. Further, and even assuming that a breach by Centrecorp of the management agreement for the Quebec Property can give rise to grounds for dismissal of Centrecorp under the Property Management Agreement, the evidence of such a breach, in my view, amounts to no more than a bald allegation by First City at this stage. To have any traction, there must be more.

[37] Accordingly, I have no hesitation in concluding from the evidence that North American has established a strong prima facie case of breach of contract. First Capital’s actions in purporting to terminate Centrecorp as the Property Manager of the McLaughlin Property were, as reflected by Mr. Segal’s actions during the Co-Owners Committee meeting on December 19, 2014, unilateral, arbitrary and high handed. They constituted a clear breach of contract.

2) Irreparable Harm

[38] North American submits that where it can be shown that the responding party is clearly in breach of a negative covenant, the requirement to establish irreparable harm and balance of convenience is lessened. In support of that submission, it relies on Canada (Attorney General) v. Saskatchewan Water Corp. (1991), 1991 CanLII 3951 (SK CA), 109 Sask R 241, [1991] SJ No. 403 (Sask. C.A.) at para. 36 and Van Wagner Communications Co., Canada v. Penex Metropolis Ltd., [2008] OJ No. 190 (S.C.J.) at para. 39. North American further submits that the relevant portions of the Co-Owners Agreement and the Property Management Agreement which First Capital is in breach of constitute negative covenants in favour of North American.

[39] I do not agree that the relevant provisions in the Co-Owners Agreement and the Property Management Agreement, such as the requirement that decisions be unanimous or that Centrecorp be appointed exclusive property manager, constitute negative covenants. When the agreements are considered in their entirety, the substance of the obligations is clearly positive, not negative.

[40] In any event, even if the breach of a negative covenant may give rise to a lessening of the requirement to establish irreparable harm, RJR-MacDonald makes it clear that it is still necessary for the plaintiff to establish irreparable harm in order to obtain an injunction. As I said in Van Wagner, at para. 39, “Even where there is a clear breach of a negative covenant which is reasonable on its face, the issues of irreparable harm and balance of convenience cannot be ignored.”

[41] More recently, the Divisional Court has stated that there is no presumption of irreparable harm arising from a finding of a strong prima facie case of breach of a negative covenant: MD Management Ltd. v. Campbell, 2010 ONSC 6373 (Ont. Div. Ct.) at paras. 5 and 9.

[42] Irreparable harm is described as harm that either cannot be quantified in monetary terms or which cannot be cured, usually because one party cannot collect damages from the other: RJR-MacDonald at para. 59.

[43] North American submits that it will suffer irreparable harm arising from First Capital’s breaches in two respects: First, any rights that North American has in the Co-Owners Agreement and the Management Agreement concerning the unanimous requirement for decision making and the appointment of Centrecorp as property manager have been eviscerated by First Capital’s unilateral breaches of contract. First Capital should be held to its bargain. Second, the termination of Centrecorp creates an uncertainty at a time when the McLaughlin Property is in transition in respect of its major tenants which could result in possible harm to the McLaughlin Property.

[44] I do not consider North American’s first point to constitute irreparable harm. The traditional remedy for breach of contract is damages. The harm which North American says it will suffer arises from not having its affiliate Centrecorp manage 50% of the McLaughlin Property. It also says that it will be stripped of its rights under the Co-Owners Agreement to vote on this and any other issue. To the extent that North American suffers any damage arising out of First Capital’s actions, in my view it can be compensated for in monetary damages. The fact that First Capital’s breaches are flagrant does not by itself establish irreparable harm.

[45] The second aspect of irreparable harm relied upon by North American relates to the uncertainty of what will happen to the current negotiations with potential tenants. The issue relates to ongoing tenant negotiations for recently vacated space. Mr. Weiss, Vice President and General Counsel of North American stated in his affidavit that the timing of the purported termination “is detrimental to the effective management of the McLaughlin Property given the current delicate state of negotiations by Centrecorp with a possible replacement tenant for the vacant anchor supermarket space.” The evidence establishes that the “possible replacement tenant” Mr. Weiss is referring to is Goodlife Fitness and that First Capital has been directly involved in the Goodlife negotiations, along with Centrecorp, as well as negotiations with other tenants. Notwithstanding its actions therefore, First Capital’s roll in respect of negotiations with tenants or prospective tenants is not likely to change or result in harm. I am therefore unable to conclude that North American will suffer any harm from First Capital’s improper actions in relation to tenant or prospective tenant negotiations.

[46] In my view, North American has failed to establish that it will suffer irreparable harm as a result of First Capital’s unilateral breach of contract. In fact, I have trouble understanding what actual damages North American will suffer. Given that First Capital has a 50% interest in the McLaughlin Property, I consider it unlikely that it will do anything to damage the value of the property. Further, Centrecorp, which has been looking after the day to day management of the McLaughlin Property since 2001, still represents the interests of North American. While there is some doubt as to how the management of the McLaughlin Property will operate going forward, the parties have successfully co-managed other co-owned property in the past. That said, and to the extent that North American does suffer damage from First Capital’s breaches of contract, in my view it can be compensated in monetary terms.

Balance of Convenience

[47] In light of my conclusion that North American has failed to establish irreparable harm, its motion for an injunction fails. Accordingly, I do not intend to say much concerning the balance of convenience. I do consider, however, that the balance of convenience favours maintaining the status quo and accordingly the granting of the injunction.

[48] First Capital submits that it is clear that the parties cannot work together and should not be forced to do so by an injunction. The problem with that submission is that it is First Capital that has created the unworkable situation. Prior to its calling of the Co-Owners Committee meeting, there had never been any complaint concerning Centrecorp’s management of the McLaughlin Property. In addition, and as I have discussed, I do not consider there is any basis to First Capital’s allegations concerning Centrecorp’s response to it’s due diligence requests leading up to the sale of the Quebec Property.

[49] Finally, just because the parties have engaged in litigation does not mean that North American and First Capital cannot continue to work together in respect of the McLaughlin Property going forward. This is not the first time the parties have been engaged in prior litigation against each other arising out of their co-ownership of property and managed afterwards to continue dealing with each other.

Conclusion

[50] For the above reasons, therefore, and specifically because it has failed to establish irreparable harm arising from First Capital’s breaches of both the Co-Ownership Agreement and the Property Management Agreement, North American’s motion for an interlocutory injunction is dismissed.

[51] North American submits that in the event it is not successful on the motion, it should receive its costs in light of the actions of First Capital. First Capital submits costs should follow the event. The parties have agreed on costs of $46,000. While costs normally do follow the event, in the circumstances as I have found them, I order no costs.

L. A. Pattillo J.

Released: January 28, 2015